First-time buyers turned off by low real estate prices?
I'm a tad late sharing my thoughts on this June 6 New York Times piece on real estate prices by Yale economics professor Robert Shiller, but better late than never.
Shiller appeals to historical trends and past recessions to make a case for his theory that home prices will continue to fall for years to come, even after other consumables recover most of their lost value once the economy perks up (whenever that happens). Shiller's use of history seems solid; after all, housing prices in the L.A. area didn't start marching upward until the better part of a decade after the '91 recession, the '92 riots and several major earthquakes sent Southern California real estate values plunging in a hurry.
What puzzles me about this piece is the point at which Shiller wades from the bedrock of history to speculation about consumer behavior in the housing market, namely his attempt to get inside the minds of young couples who are renters. Writes Shiller:
Among couples sharing a house, for example, any decision to sell and switch to a rental requires the assent of both partners. Even growing children, who may resent being shifted to another school district and placed in a rental apartment, are likely to have some veto power. ...
Imagine a young couple now renting an apartment. A few years ago, they were toying with the idea of buying a house, but seeing unemployment all around them and the turmoil in the housing market, they have changed their thinking: they have decided to remain renters. They may not revisit that decision for some years. It is settled in their minds for now.
Let me graciously offer myself as a case study for the "young couple now renting an apartment." I am under 30, was married in 2007 and currently rent an apartment with my wife. In our case (and for many other non-homeowning twenty-something couples), Shiller has it exactly backward: The astronomically high home prices of the pre-2007 bubble were extremely discouraging, and made buying a home back then seem as realistic a possibility as owning a private jet. Cruel as it sounds, the steep decline in prices is exactly what we have been holding out for to break into the market -- and yes, as a Los Angeles Times staffer, I do indeed see unemployment all around me. In 2006, the American-as-apple-pie ritual of buying a home was a matter of creative financing and a willingness to take major risks on homes almost no one could actually afford. Today, affording a decent down payment is simply a matter of saving enough for a few years. I can't emphasize enough how much this matters to those of us who felt locked out of the housing market by unsustainably high prices.
Would not most Americans be better off if real estate prices never returned to the bubble prices?
I'm not relying on any statistics or economics education - just intuition. I recall my parents selling a house in the 1960s and being grateful that they didn't lose too much compared to their purchase price - kind of like when one sells their car. That always seemed to me to be better for people. A new house would cost more than a resale. A resale house might sell for more if it had been improved in some way. Most houses would depreciate to some extent. That seems like that would keep housing affordable and stop the unrealistic notion that one's shelter is also one's retirement plan.
For your house to also be a good investment, you have to either sell it and move to something less expensive to get the money, or take out a loan for some of the equity and pay interest on that loan. I don't know why anyone thinks that's good for most Americans.
Because people do believe that, a lot of people have become dependent on real estate as an industry. Of course, it is painful for them now with prices and employment related to real estate down, but wouldn't we all better off if it stayed that way? Don't all of these artificial attempts to reinvigorate that part of the economy just invite more of the same bad results? Let's go back to manufacturing things we can export.
Posted by: The Skog | October 30, 2009 at 05:51 PM
First of all, the way Schiller describes a young person fits my profile EXACTLY. And to take his theory a bit further, I will say the biggest reason, among many, that I continue to rent instead of buying is that I know the money I have saved for a down payment for nearly a decade will simply vanish if I buy anything within the next 3-4 years. Thinking rationally, instead of emotionally, I know the right decision is to continue to rent, then take full advantage of the situation when housing prices are the lowest and I am one of the very few who will have plenty of money and great credit to purchase a very devalued asset.
Posted by: Vindicated | June 17, 2009 at 02:02 PM
Robertc - you have an interesting point. However, interest paid on mortgages is tax deductible, and is usually so big that the taxpayer then breaks through the threshold for the standard deduction and gets to write off many more thing than he/she otherwise would. Therefore there is a huge tax advantage to owning. In addition, you are not paying off someone else's mortgage with your rent money. And while, you are right in that by the time the mortgage is paid off, you will have spent 2-3 times more than the original purchase price, owing a home is the best protection against inflation because, if you get a fixed rate mortgage, your monthly payments never increase. Whereas with rent, your landlord will undoubtedly raise your rent payment every year.
That said, I do not agree with SportyandMisty on the "extra income" - you are still out the $2,000 a month until the house is paid off.
Posted by: Brenda | June 17, 2009 at 12:01 PM
Dear SportyandMisty:
You have it backwards...
Owning a home means paying thousands of dollars each year in real estate taxes and, more significantly, paying many times more than the value of the home in interest expense over the term of the mortgage.
Lets look again at the two identical homes, side by side.
One couple rents, and takes the savings in interest and taxes and tucks it away in a safe, low yield investment.
The other couple owns the home and invests in the possible appreciation of the property.
Fast forward 20 years ... The owners' home will have to triple in value to have the same return as the renters savings AND they will have to move out and sell the home to realize the profit. The renters' profit will already be liquid.
That is not to say there is no value in owning... there certainly is. A homeowner can customize her home as she see's fit. Renters do not have that luxury.
Posted by: Robertc | June 11, 2009 at 05:17 AM
Remember, the most important thing about home ownership is that you get tax-free income in the amount of the fair market rental value of the home you own & live in.
To see how this is true, imagine two identical houses, right next door to each other. You buy one & live in it; I purchase the other for the exact same price & live in it. Imagine what our IRS 1040s would look like.
Now, instead of living in the house you own, you instead rent it to me, and I rent you my house. You live in mine & I live in yours. The value of the houses is identical, so I pay you the fair market rental amount & you pay me the fair market rental amount, which, in this case, is the same. For the sake of argument, I'll pick a number: $2,000 per month in rent. You pay me $2,000 each month in rent, and I pay you $2,000 each month in rent.
NOW... imagine what our IRS 1040s look like. In addition to our other income sources, each of us now has EXTRA INCOME in the amount of the fair market rental being paid to us by each other -- in the example, and extra $24,000. We also have some depreciation. At the end of the day, our taxes go up by the tax rate on that extra $24,000 income.
So clearly, in the normal case where we each live in the home we own, we "pay ourselves" the fair market rental rate, and that extra income is tax free.
I don't know about you, but I can sure use the extra $24,000 in tax free income.
Thus, owning a home
Posted by: SportyandMisty | June 10, 2009 at 07:03 PM
I definitely see the point of your response to the editorial--you are a smart, young couple who didn't buy the fevered mania that real estate prices would somehow appreciate forever, and now you are in a position to buy a home if you want to.
I think what the author of the editorial is suggesting, however, is that a mania of the magnitude of this last housing bubble is not going to be wrested from the collective psyche until every last dollar of excess value is wrung out of the housing market. In my opinion, as a homeowner a little bit older than you (I'm 44), there is a long way down from here before the average person stops thinking of real estate as a "get rich quick" scheme, and without that change in thinking, another bubble will crop up, with its attendant collapse shadowing it.
Houses were long-term investments even when I was in my later 20's, investments that were not easy to liquefy and really only profitable over decades of time. The notion that houses are short-term profitable investments has nearly destroyed our economy, as we all know. But until the numbers of new foreclosures drop dramatically and stay low, prices are going to be dropping, so take your time and buy something you actually want to live in long term, because whatever you buy will be worth less than its purchase price for quite a while after you buy it...
Posted by: dave mortenson | June 10, 2009 at 11:53 AM
I agree. I am 28, and I and my partner are renters entering the housing market for the first time this summer. We didn't buy in 2006 because there was no way we could afford the down payment for a home. Now is our chance - our only worry is that one of us could get laid off, so we are being sure that we buy a home we can afford on one income and are continuing the saving. That way we won't join the next wave of forclosures...
Posted by: h.w. | June 09, 2009 at 04:24 PM